My Current View Of The S&P 500 Index: October 2022 Edition

In this month’s article I outline why I am maintaining my October’s allocation to the SPDR S&P 500 ETF (NYSEARCA:SPY) at 40% with the other 60% of my assets in cash. First let me review my pension plan performance in September. The market, as measured by the S&P 500 index, lost 9.34% for the month. As for my pension plan assets, I outperformed the index as my investment allocation only lost 3.53%. My investment objective of preserving my capital was not met as I did not make money. I did meet my second investment objective which is beating the S&P 500 index. These results are the same as last month. Table 1 below shows my returns and allocations for the month of September and Table 2 below shows my returns for the past 12 months.

I have made changes to Table 2 below after I received a comment from a reader. Table 2 shows new columns to better (more accurately) reflect my investment results. The third column, $100K Hypo, is what my returns would be if I started my account with $100,000 in my first article of this series and followed the allocation recommendations from my articles. The fifth column, $100K SPY, shows the returns of just investing $100,000 and keeping it all allocated to SPY. The percentage returns in the last row show that my strategy returned a negative 8.23% for the last 12 months and simply investing in SPY would have returned a negative 15.49% for the last 12 months. Therefore, I have outperformed SPY for the last 12 months by 7.26%.

Table 1 – Investment Returns for September

Table 2 – Investment Returns Last 12 Months

To review the purpose of this series of articles, my retirement account only allows me to buy the following four ETFs: iShares Core U.S. Aggregate Bond ETF (AGG), SPDR S&P 500 ETF (SPY), iShares Russell 2000 ETF (IWM), and iShares MSCI EAFE ETF (EFA). I can also have my money in cash. The question is how to decide where and when to allocate money to these various ETFs.

I use my moving average crossover system combined with relative strength charts to determine how to allocate my pension plan assets. My moving average crossover system uses the 6 month and the 10- month exponential moving averages to identify which of the four ETFs are in position to be bought. If the 6-month moving average is above the 10-month moving average, then the ETF is a buy. I call this setup being in bullish alignment. When the 6-month moving average is below the 10-month moving average the setup is referred to as a bearish alignment. When a bearish alignment happens, I don’t want to hold that asset. See Chart 1 below for a long-term look at the S&P 500 index using my moving average crossover system.

Chart 1 – Monthly SP 500 Index with 6/10 Moving Averages

You can see that the moving average crossover system provided some excellent long term buy and sell signals that would have allowed investors to capture long duration moves in the index; while avoiding costly drawdowns. Avoiding these costly drawdowns allows me to meet the objective of capital reservation.

I employ this strategy because I do not want to experience a large drawdown with my pension assets. During the 2008-2009 market crash many people didn’t even look at their retirement statements because they were afraid of what they would find. I submit that if those people would have used a market strategy like what I outline in this series of articles, they would have been able to avoid much of the decline during the bear market and consequently would have had less emotional stress during that time period.

The following charts show the current status of the ETFs that I am allowed to buy in my retirement account.

Chart 2 – Monthly SPY with 6/10 Moving Averages

Chart 2 shows that SPY declined over 9% in September. It was a tough month for bulls. SPY remains in bearish alignment. Volume did increase which is bearish. The SPY candle is a very bearish one closing at the low of the month. SPY also closed below the June lows. There is nothing bullish about that development. As I look at Chart 2, I see a potential demand zone where bulls could step in, at the 320 level. The demand zone is outlined in blue. Right now, things don’t look good for SPY. We will see where we go from here. For October, I am staying with my allocation of 40% to SPY. I will look to increase my exposure to SPY once SPY closes above its 10-month moving average which is in red.

Chart 3 – Monthly IWM with 6/10 Moving Averages

Chart 3 shows that small cap stocks fell hard losing 9.66% in September. IWM remains in bearish alignment and like SPY in Chart 2, IWM’s candle for the month was bearish. Volume increased which is also bearish. If you’re a bull on IWM, a positive sign is that IWM held the June lows. It’s the only ETF in this article that was able to do so. That green line on the chart has held so far. The longer IWM remains above the green line, the more valid that level of support becomes. The next bullish development would be IWM closing above the blue 6-month moving average.

Chart 4 – Monthly IWM:SPY Relative Strength

Chart 4 still shows that the IWM:SPY ratio is perhaps bottoming. In September the ratio ticked down slightly as IWM underperformed SPY. The low level seems to be holding which is bullish if you are an IWM investor. Despite that bullish feature, the ratio remains in bearish alignment. While the ratio is in bearish alignment the two averages seem to be flattening out and in the case of the blue 6-month moving average, turning higher. That can be seen as a bullish development. Before I consider allocating money to IWM I need to see the ratio get above the red ten-month moving average. This could happen soon.

Chart 5 – Monthly EFA with 6/10 Moving Averages

Chart 5 shows that EFA lost 9.22% in September. It was a bearish month with a bearish candle closing just off its lows for the month. Like SPY and IWM, EFA traded on higher volume. EFA remains in bearish alignment. Looking at Chart 5 I don’t see much in the way of support for EFA. EFA could test the COVID lows. As I wrote before, EFA has some work to do before I would consider allocating money to that ETF. I need to see EFA close above the red ten-month moving average.

Chart 6 – Monthly EFA:SPY Relative Strength

There is nothing new to report for Chart 6. The EFA:SPY ratio ticked up a bit in September. The ratio remains at its lows. When looking at a price chart and you see price move from the upper lefthand side to the lower righthand side of the chart, that is the textbook definition of a downtrend. I need to see this ratio close above the red 10 month moving average before I allocate money to EFA over SPY.

Chart 7 – Monthly EFA:IWM Relative Strength

Chart 7 shows that EFA outperformed IWM in September by 0.49%. The ratio has flipped from being in bullish alignment to now being in bearish alignment. The recent series of higher highs and higher lows has been broken. I will continue to watch this chart to see how events unfold.

Chart 8 – Monthly AGG with 6/10 Moving Averages

Chart 8 shows that AGG lost 4.14% in September. It was a bad month for AGG investors. AGG remains in bearish alignment, lost the green line of support, and the June lows. AGG is now at levels last seen in 2018. AGG is now down over 16% from its highs in August 2020.

Chart 9 – Monthly AGG:SPY Relative Strength

The AGG:SPY ratio in Chart 9 gained 5.62% as AGG outperformed SPY in September. The ratio is on the cusp of being in bullish alignment. Both moving averages are trending higher. The ratio is trying to make a series of higher highs and higher lows. We will see if it succeeds.

In summary, all the ETFs I covered in this article lost money in September. AGG performed the best by losing the least for the month. All the price charts are in bearish alignment. All the price charts are now below their June lows. I see no reason to change my allocation for October. I am keeping my allocation of 40% in SPY and 60% in cash. That may be too conservative, and I can live with that. It could also be too aggressive. We will see. I wrote last month that “… the bear market may have been made as every ETF remains above the June lows. I don’t know.” Well, that proved to be incorrect. There may be more downside ahead for the markets. If SPY closes above its blue 6-month moving average in October, I will increase my allocation to SPY and reduce my allocation to cash. We are now in the unfavorable months for the stock market; June-October. I just try to follow price and the trend. Right now, the trend for equities and bonds remains down. I will monitor the markets for the month of October and then reallocate, if necessary, at the end of the month.